September 2012 Bar Bulletin
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September 2012 Bar Bulletin

Stock Compensation and Wage-and-Hour Laws

By Matthew King

 

Seattle is a startup city. Startups often have a good idea, but limited resources to pay their employees. As a result, many of them make stock grants or stock options as part of their employee compensation. Mariners part-owner and Microsoft millionaire Chris Larson is a prime example of how obtaining startup stock can make someone wealthy.1

But a stock-compensation structure can be more trouble than it's worth under Washington wage-and-hour laws, particularly where stock grants or options are used to effectively replace a wage or salary that is owed.

RCW 49.46.010(2) defines "wage" as "compensation due an employee by reason of employment, payable in legal tender of the United States on banks convertible to cash on demand at full face value, subject to such deductions, charges or allowances as may be permitted by rules of the director[.]" In contrast, a stock option is the right to purchase a specified number of shares of a designated stock for a particular price during a stated period of time.2

RCW 49.52.050 reflects a strong legislative policy favoring paying wages to employees, and courts liberally construe its scope.3 It was enacted by the Legislature to prevent abuses by employers in the labor-management setting.4 The law curbs employers and certain employees with positions of financial authority (namely officers or other employer-agents) from willfully and intentionally depriving employees of wages.5

Stock options and "wages" are diametrically opposed to one another in that "wages" are compensation for services already provided, not an incentive or reward for enhancing the market value of the company. Granting employees the opportunity to acquire an ownership interest is simply not the same as paying wages or even paying bonuses on salaries. Accord­ingly, courts throughout the country hold that stock option, incentive awards are not "wages."6

In Bates v. City of Richland, for example, the court applied the definition of RCW  49.46.010(2) in ruling that pension benefits qualify as "wages" under Washington's attorney fee shifting statute, RCW 49.48.030.7 However, RCW 49.46.010(2) provides that compensation must be "payable in legal tender" in order to qualify as "wages," a requirement that employee stock option grants plainly do not satisfy.

"Wages" has been defined a number of ways. In Int'l Ass'n of Fire Fighters, Local 46 v. City of Everett, the "wage" at issue was the quintessential wage - back pay.8 In Flowers v. TRA Indus., Inc., the court described "wages" under RCW 49.48.030 as "moneys due by reason of employment."9 In re Marriage of Ayyad involved the question of whether cash profits from the exercise of stock options qualified as "income" for purposes of determining child support payments.10

An analogous law, the anti-kickback statute,11 does not expressly define the term "wages," but the statute plainly contemplates something that is "paid" to the employee. The contractual rights to purchase stock are not equivalent to wages "theretofore paid."


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